The Physician Labor Market in a Managed Care‐dominated Environment

The belief that doctors respond to declining demand by treating patients more aggressively has created skepticism about relying on market forces to restructure physician supply. We argue that even if the physician labor market is dysfunctional under fee‐for‐service incentives, it can perform better as managed care becomes dominant. Our model implies a nonlinear effect of managed care penetration on incomes. Physicians can offset most or all of initial declines in demand, but cannot insulate themselves indefinitely. This may explain the observation that, until recently, the growth of managed care has not been accompanied by large physician income changes. (JEL III, J31)